Towards the end of March 2020, the Indian government announced a national lockdown which confined people to their homes and most businesses (save essentials) were shut. This period lasted for about 2-3 months and had a serious impact on the country’s economic growth. A while later, when the Delta wave of Covid was spreading, some states announced a 2nd lockdown. The economy took a hit to keep large vulnerable sections of the population alive and healthy. This was truly a once in a lifetime situation which I hope does not happen again. The last such situation was more than a century back when the Spanish Flu was spreading over the world.
As smart investors, we need to accept and be comfortable that there will be some ‘unknown-unknowns’. Even if we can’t prepare for it in advance, we can act quickly to mitigate the downside to our portfolio and reposition ourselves to benefit when the worst is over. The Covid period taught me some serious lessons which I’ll remember for a long time. Here are my learnings:
- Most recessions are either due to demand or supply shock. Covid was a double whammy where both demand was curbed (people locked in their homes) and supply was restricted (most non-essential businesses were shut or were forced to operate with significantly reduced capacity). Thus, the entire market fell. Typical recession time investment playbook got thrown out of the window. Learning: Be prepared for the unexpected. Past templates may not work.
- At the peak of Covid, every newspaper and TV channel screamed doomsday and rising daily death count was a frequent topic of discussion. There was horrible grapevine – relatives who died, friends who were told by the doctor to consume upto 40 tablets, severe side effects post covid recovery, terrible conditions in the hospital, oxygen shortage etc. Yet, due to human ingenuity, we were able to formulate, manufacture, and supply vaccines to more than a billion people within less than a year. Learning: Pessimism is like sex – it sells! It’s super hard to remain optimistic when everyone else is going insane. Smart people/societies/companies/countries always find a solution – never bet against them. The best time to invest is when the world is going mad.
- The most obvious investments did exceptionally well. It’s relatively easier to work independently and remotely in the IT industry than for a manufacturing firm. Similarly, Covid scared everyone young and old and made people conscious of their health. As a preventative measure, medicine stocking and consumption went up multi-fold. There was a new found love for multi-vitamins, homeopathy, ayurveda etc. Learning: You don’t always have to go against the herd. Sometimes, it helps to keep things simple and focus on the basics and most obvious opportunities.
- In previous decades, recessions and bear markets used to last an average of 12-18 months. But this time around, due to the heavy usage of quantitative easing by developed markets and high frequency algorithmic trading, bulls came charging just 2 months into a bear attack. The astonishing speed with which the market rose was shocking for all market pundits. Many stocks went up 5-10x from their lows in a short span of 3 months – madness was quickly replaced by euphoria. Learning: It pays to be invested as its very hard to time the bottom. Additionally, due to hyperbolic discounting, a lot of undiscovered great companies give several years’ worth of returns in a few months. One cannot predict the macro (government actions) but one can predict the micro (high quality companies).
- The absolute highest returns were given by those who fell the most no matter their size – commodities like metals, mining, and other cyclicals (eg. hotels, airlines etc). Just to give an example, a mega giant like Tata Steel’s share price rose 5.5x from April lows and mining major Vedanta’s stock went up 7x. Similarly, Indian Hotels (the company behind Taj Hotels) has given 6x returns. Learning: due to their essential nature and temporary demand, supply shock, cyclicals were artificially suppressed, and hence when lockdowns were lifted they came roaring back. The rate of rise was much more than consistent secular compounders who also fell less.
- In the summer of 2020 when discussions of China + 1 was at an early stage, one promising sector which investors were betting to the moon was specialty chemicals. Every tom, dick and harry was investing in companies making specialty chemicals without really understanding the difference between basic and specialty, global supply chains and capacities, demand for different types of chemicals, cyclicality of end user industries etc. Great widespread story telling led to certain B2B chemical manufacturers getting rerated to 50-70 PE (with a few even going past 100!) – same as their secular FMCG counterparts. The realization dawned after a year that Chinese chemical giants dictated prices worldwide and Indian companies were highly vulnerable – the entire sector got derated at the first sign of a China caused slowdown. Learning: Every season, the market will come up with a new narrative about a sector which is going to beat the world, grow to XXX billion by 2030, is a giant in the making etc. Don’t buy the hype and always believe in certain truths – great companies don’t necessarily make great investments, most B2B companies are more cyclical/less predictable than B2C ones, past success does not guarantee future growth, market gets bored very fast and moves to a new sector at the first sign of trouble.
- Developed countries fleshed out ‘helicopter’ money – thousand dollar cheques were mailed to all citizens to boost suppressed demand. The governments hoped that people would use the extra money to go out buy some new products, spend at hotels, and lift the economic growth. This did happen but on a very small scale. Consumers today are much smarter than previous generations, they ended up paying back their credit card debts and clearing mortgage bills. So, the government’s stated goal failed. Learning: you cannot force the population to act (unless it’s a dictatorship). Government intervention needs to be minimal and light touch. Educated populations will do what is best for them and not necessarily what the government wants them to do or what is best for the economy.
- A lot of people were laid off worldwide – gurus pontificated that this would benefit India (they didn’t use the correct phrase – ‘over the long term’). This added to every nation’s economic injury and debt growth. Political circles were abuzz with the word – resilience, over optimization. Key topics of discussion became friend shoring, China + 1, demographic dividend. A couple of years later, the biggest beneficiaries have been countries like Vietnam and Mexico (and India to a lesser extent). What is not talked about is that Chinese companies have been investing heavily in these countries (as against the notion of a true Vietnamese/Mexican champion emerging) and rerouting their products from these locations. They can do so because they have the size, scale, technology, and know-how which is just not there with other manufacturers. Learning: feel good hyperbole like democracy, human rights, China + 1, demographic dividend will not get us anywhere. The future stock market winners will be those that invest in automation which increases productivity and innovation which can help us leapfrog the Chinese.
- Businesses like to talk about ESG compliance in their annual reports and investor presentations. They are not doing this out of virtue but because a) a small vocal socially active minority likes to impose their views and b) it will attract ‘holier than thou’ Western capital. Years of underinvestment in hard, real assets has led to proliferation of Amazon and Deliveroo type jobs in the West. Covid forced Western governments to realize that re-industrialization is the way forward otherwise all is lost. Laissez-faire was replaced by statist government directed subsidies. They cannot compete with China and continue to be a global leader if their factory is in China. Learning: The Indian government’s policy of Make-in-India supported by targeted PLI in multiple sectors has been a boon and will bring tremendous benefits to our country. We are too poor to focus on a services led growth model as there are millions of unemployed youth who can be used in manufacturing jobs. Policies shape institutions that shape actions that shape outcomes. To predict future growth of a sector, understand the policies in place. The coming decade will be great for Indian manufacturing.
- If you read The Economist or Financial Times or New York Times or The Wall Street Journal or The Guardian, you’ll be left with a perception that there are so many problems in India and both our people and politicians are incompetent. While we do have our fair share of problems as every democracy has (gun related deaths in the US and UK’s brexit self-goal to name a few), everything is not as bad as it seems. Over the last 75 years, India with a population that’s more than USA + Europe has made a lot of progress even though we complain that a lot of more could have been done. We are much better off than our parents and our grandparents in every single way. Learning: The grass is not greener on the other side. Nobody believes the official Chinese death count even as they have kept their population locked in for 3 years now. Pfizer vaccines are causing severe health problems in the West and average western consumer is now subject to structurally high inflation due to failed priorities of their government. As an investor, India is the best place to be. In the coming decades, we will solve all our problems, and regain our rightful position as the World’s largest economy – by 2050 or 2070, the year can be debated but it will happen. Karma and critical mass are on our side.
Covid-19 will not happen again. There will be something else. Investors like to say history doesn’t repeat but it rhymes. There could be an earthquake, UFO arrival, World War 3 etc. Anything is possible – we as investors need to be optimistic, believe in ourselves and our country. We will make great returns as long as we don’t panic and are able to take level headed decisions keeping the long term in mind.
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